If I had a billion dollars… (second verse)

…I would build you a bank. (But not a bank like the ones we have that’s cruel.)

The debate du jour around the world’s capitals and financial centers is of course “How do we save the banking system?” Good banks. Bad banks. Private banks. State banks. Capital injections. Credit insurance. Etcetera. But in this Dr. Seuss world of solutions, and despite thousands upon thousands of articles, blog posts and editorials, I have been very surprised to see that one crucial element seems to be missing from all the solutions being discussed: innovation and entrepreneurialism.

Governments should invest (at least) a small amount of the billions and billions they are ploughing into the financial system into new banks. That’s right – start-ups. But not carbon copies of the banks we have today. 21st century banks. Banks that aren’t built on foundations of obsolete business models and technologies. Banks that are “digital natives”. Banks that by design answer the question: “If you had a blank sheet of paper, how would you build a platform and and organization to provide banking services in today’s (and tomorrow’s) world?” Banks that not only understand the importance of Moore’s (and Kryder’s) and Metcalfe’s and Linus’ and Amara’s laws but also their ramifications for a business that is intrinsically and structurally about managing digital information flows in a connected society and economy. Banks without (literally and psychologically) the corrosive burden of legacy costs and structures. Banks who apply Coase’s theories in the context of transacting in a networked world. Banks who embrace the lessons of Dunbar and Kahneman and Thaler (and Sunstein) when designing their management and compensation policies. Banks that strive to live up to Einstein’s suggestion that “things should be made as simple as possible, but not any simpler” and have an instinctive bias against complexity and a copy of Maeda‘s The Laws of Simplicity in the Board room. Banks that recognize that when you boil it all down, the product they are ultimately selling is trust.

(adapted from Wikipedia) A bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. It is an institution for receiving, keeping, and lending [and investing] money.

Obviously in order to build such a bank you need a team of leaders who not only understand banking and finance but understand intuitively the social and technological landscape of the 21st century. Bankers who refuse to trivialize novel tools and modes of communication and interaction simply because they are unfamiliar. Bankers who are as comfortable on Facebook or Twitter as they are on a trading floor or in a branch. Bankers who collect and collate their daily information via RSS readers and wikis and blogs and not just from the FT or CNBC or Bloomberg. Bankers who have accepted that the value they can create no longer comes from arbitraging information scarcity and building black boxes that hide complexity but from embracing abundance and building tools to help people navigate this complexity as partners. Bankers who would be equally comfortable discussing the future of finance with the founders of Google as they would be with the governor of a Central Bank. Bankers who are passionate yet sober. Bankers who are focused on the future and on providing a service that doesn’t rely on coercion or inertia or lack of alternatives to keep their customers satisfied. Bankers who realize what a tremendous opportunity exists to start afresh and be part of creating a new paradigm in financial services.

These individuals exist. Many are readers of this blog. I am one of them. So is Amy. We are connected to many more via our networks. I suspect that many of them would jump at the chance to participate in a venture (or ventures) like this. And not just because the financial opportunity cost of doing so has plummeted (although that clearly helps, everyone has bills to pay…) but because it’s exciting. Because it would be challenging. Because it’s the right thing to do.

So why not just do it? Why the government? Why a billion dollars? Because building a bank by bootstrapping from nothing is exceedingly difficult, perhaps impossible. There are many reasons, importantly:

• The fundamental nature of the business – selling trust-based products and services in a highly regulated environment – means that the minimum level of operating costs and capital required to be credible is substantial.
• Perceptions are important, especially in these turbulent economic times; no matter how abusive the relationship (with their existing bankers), people and companies are going to be initially very cautious about giving their custom to a new bank, especially one that is obviously not too big to fail (indeed the implicit endorsement of the government in this context is probably even more important than the capital itself.)
• Much can be achieved within the existing legal and regulatory framework, but many of the most interesting opportunities rely on this “institutional framework” evolving to “catch up” to the technological and economic reality; having the government as a partner would facilitate the dialog and help to counter the inevitable resistance from incumbents who have a vested interest in maintaining the (old) environment to which they have adapted.
• Because as a taxpayer if I am forced to invest in the old (to mitigate catastrophic systemic risk), I want to also invest at least a part of my money in the future (to help build and profit from the reinvention of banking): remove the cancer yes, but start working on the cure.
• As for the billion dollars, this was just a nice round back-of-the-envelope (somewhat informed) guess (plus it fit with the song!); this would be sufficient equity to build an operation with credibility and critical mass, and would support a sufficiently large but conservatively leveraged asset base to produce enough operating income to sustain growth and profitability (and pay back the government in full over a 5-15 year horizon without jeopardizing the business.) The right (minimum) amount needed could well be less, is unlikely to be more and would not need to come 100% from government coffers – indeed private co-investment would be desirable – and further the bulk of the capital would likely be called over a period of 1-3 years as the balance sheet is built up.

I’m deadly serious but to be frank, I’m not sure where to go with this. Although I have a pretty interesting and diverse network that includes a number of even better connected people, I don’t think I’d have much success cold calling Mr. Brown or Mr. Darling and getting a chance to pitch this over a latte at the local Costa… Even less Mr. Obama or Mr. Geithner… But perhaps if nothing else, I can catalyze the conversation and bring this option – earmarking at least a small portion of the various btrillions of rescue funds to seeding a new generation of 21st century banks – to the attention of the politicians and the public.

I know there is a risk that this proposal sounds like just one more in a never ending line of petitioners going to the government for a handout. I hope that (at least, especially regular) readers will not doubt my integrity when I assure you that this is not my intent, and I genuinely believe that this is an idea worthy of serious consideration. And most importantly that – in this context - the government’s money is actually more valuable than anyone else’s. To get started. Essentially I’m suggesting the government(s) have a unique competitive advantage that makes them the ideal incubators for a new generation of banks (and that they would realize excess financial returns by exercising this advantage.)

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